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Exchange-Traded Funds: a great fit for 401(k) plans
Our goal at ShareBuilder 401k is to empower 401(k) savers with the right fund options at the least amount of expense. We believe this gives participants more control in reaching their financial goals.
Our Fund Line-up
The core fundamentals that drive our fund line-up selection are straightforward:
- Costs matter: low-expense funds can help your money work harder
- Diversification of your money (assets) is critical: having all your eggs in one basket is a bad call
- It’s a long-term proposition: following short-term trends is not an investment strategy
This is what led us to creating an all-ETF based offering for ShareBuilder 401k. And as we’re not a fund provider, it gave us free reign to handpick the fund line-up without bias.
Strong Historical Performance and Low Expenses
ETFs offer low-expenses, a broad array of asset categories, and fee transparency. ETFs are like index mutual funds in that they track the make-up of a market index like the S&P 500 but can be traded throughout the day like a stock. When you consider the following, you can see why ETFs are a great fit for retirement plans:
Across major asset categories, the benchmark indices have historically beaten 70%+ of actively managed mutual funds.
| Asset Category | Comparison Index | Funds Underperforming the Index* |
|---|---|---|
| Large-cap blend | S&P 500 | 71.9% |
| Mid-cap blend | S&P MidCap 400 | 79.1% |
| Small-cap blend | S&P SmallCap 600 | 85.5% |
| International | S&P 700 | 83.5% |
| *Standard & Poor’s Indices Versus Active Funds Scorecard, 20 April 2009 | ||
ETFs expense ratios are typically lower than even index mutual funds expense ratios:
*Source: Strategic Insight, 12/08, and expense ratios for ShareBuilder 401(k) ETF options of: SPDRS, iShares Russell 2000, iShares MSCI EAFE Index Fund, and iShares Barclays 1-3 Year Treasury Bond respectively.
ETFs cover major market indices as you might expect. They also cover many specialty categories not typically in retirement plans like Treasury Inflation-Protected Securities (TIPs), a bond fund.
| Equity | Fixed Income / MM | Specialty |
|---|---|---|
| SPDRs (S&P 500) | iShares Barclays Tips Bond Fund | iShares Cohen & Steers Realty Majors |
| iShares Russel 1000 Growth Index | iShares Barclays 1-3 Year Treasury Bond Fund | iShares MSCI Emerging Markets Index |
| NASDAQ 100 Trust Shares | iShares Barclays 7-10 Year Treasury Bond Fund | iShares MSCI EAFE Index Fund |
| DIAMONDS Trust, Series 1 | iShares Barclays Aggregate Bond Fund |
The Impact of Fund Costs Can Be Dramatic
Just 1% of additional fees can take a big chunk from your nest egg. Consider a hypothetical situation of two investors, John and Alan. Both have $50,000 in a 401(k) plan and never contribute to it again. They are fortunate to both achieve 8% fixed returns each year. However, Alan’s funds have an average of 2% in fees and John’s only 1%.
As you can see the effect of the higher costs compounds and becomes profound over time. John has $98K more in 30 Years and a whopping $242K more in 40 years!
This hypothetical presentation is based on a fixed annual 8% return with no distributions or tax considerations, and does not imply future returns.
No Transaction or Commission Fees
More good news. While charging a transaction fee for ETF trades is common at most any retail brokerage firm, we have eliminated this cost to 401(k) participants by offering once a day trading. To learn more about why indexing, and in particular, ETFs make sense for long-term investing, give our guide a read: Indexing: A Smarter Way. To get the full scoop on 401(k) business and participant costs, try Understanding 401(k) Costs.
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